Financial Performance of Microfinance Institutions in ASEAN-5 Countries: An Application of Data Envelopment Analysis (DEA)

Abstract

Difficulties of commercial banks to serve the poor demonstrates their failure to supply the essential capital to the less fortunate sector in the society. Establishment of microfinance institutions (MFIs) with the distinctive characteristics of outreach to the poor and financial sustainability provides alternative tools for global poverty alleviation. Performance of MFIs is one of the most crucial aspects to assess in the effort to provide continuous financial services to the poor. The original objective of MFIs was to eradicate poverty as a social objective. However, the commercialization of MFIs in the 1990s led to their financial independence, as they had previously been funded by the government. Therefore, it is not appropriate to rely the performance of MFIs exclusively based on their social objective. They must align with the financial objective to ensure the long-term stability of MFIs in delivering financial products. This study seeks to determine the financial efficiency of MFIs in the ASEAN-5 countries. The sample is made up of data from 168 MFIs in Southeast Asia, which span five countries between 2011 and 2017. A nonparametric Data Envelopment Analysis (DEA) method is used to determine financial efficiency score. The study discovered the MFIs in the ASEAN-5 countries are financially efficient thus enable to maintain operations over the long term. The study concluded in order for MFIs in the ASEAN-5 countries to continue offering financial services to the poor over the long term, they must be financially stable.